Hubbard Business Plaza v. Lincoln Liberty Life Ins.

• Decision Date: 12 December 1986
• Docket Number: No. CV-R-82-7-ECR.,CV-R-82-7-ECR.
• Citation: 649 F. Supp. 1310
• Parties: HUBBARD BUSINESS PLAZA, a Nevada general partnership, Plaintiff, v. LINCOLN LIBERTY LIFE INSURANCE COMPANY, a Nebraska corporation, Defendant. LINCOLN LIBERTY LIFE INSURANCE COMPANY, a Nebraska corporation, Counterclaimant, v. Robert DELLER; Theodore J. Day; Jack E. McCorkle; Ray L. Wilbur III; et al., Counterdefendants.
• Court: U.S. District Court — District of Nevada

649 F. Supp. 1310

HUBBARD BUSINESS PLAZA, a Nevada general partnership, Plaintiff, v. LINCOLN LIBERTY LIFE INSURANCE COMPANY, a Nebraska corporation, Defendant.

LINCOLN LIBERTY LIFE INSURANCE COMPANY, a Nebraska corporation, Counterclaimant, v. Robert DELLER; Theodore J. Day; Jack E. McCorkle; Ray L. Wilbur III; et al., Counterdefendants.

No. CV-R-82-7-ECR.

United States District Court, D. Nevada.

December 12, 1986.

COPYRIGHT MATERIAL OMITTED

Richard W. Horton, Reno, Nev., for plaintiffs and counterdefendants Robert R. Deller, Theodore J. Day, Jack E. McCorkle, Ray L. Wilbur, III, Preston Q. Hale & Hubbard Business Plaza.

Franny A. Forsman, Las Vegas, Nev., and Jesse M. Villareal, Dallas, Tex., for defendant Lincoln Liberty Life Ins. Company.

C. David Russell, Guild, Hagen & Clark, Reno, Nev., for counterdefendants Nevada Nat. Bank and Lenny See.

MEMORANDUM DECISION AND ORDER

EDWARD C. REED, Jr., Chief Judge.

Plaintiff (Hubbard) brought this action in January of 1982 seeking to have defendant (Lincoln) restrained from collecting on a letter of credit Hubbard had given to Lincoln to secure payment of liquidated damages which would become payable to Lincoln if Hubbard defaulted on a loan commitment agreement (l.c.a.) which the parties executed under date of June 1, 1979.

The jurisdiction of this Court is invoked pursuant to 28 U.S.C. 1332(a)(1).

On September 15 and 16, 1986, a trial before the Court was held with respect to the specific issues mentioned below.

According to the l.c.a. Lincoln agreed to lend Hubbard $1,100,000, under certain terms and conditions, as permanent financing for a project for construction of three office buildings on a parcel of land in Reno, Nevada. The l.c.a. provided that in the event Hubbard defaulted because of inability to meet the conditions required to take down the loan, it would pay Lincoln $22,000 in liquidated damages. The payment of the liquidated damages was secured by a letter of credit for $22,000. Hubbard was unable to satisfy the conditions to take down the loan and defaulted. Hubbard now alleges that Lincoln is not entitled to collect on the letter of credit because the $22,000, if paid, would constitute the payment of a penalty rather than liquidated damages.

Hubbard also seeks a declaration that Lincoln is in breach of an agreement of June 9, 1980, which extended the loan commitment of June 1, 1979, under certain modified conditions for an additional period of 18 months.

Lincoln contends that it is entitled to the $22,000 as liquidated damages and is on that basis entitled to collect on the letter of credit.

After an evidentiary hearing this Court, under date of March 30, 1982, previously issued a preliminary injunction restraining Lincoln from collecting upon the letter of credit. The evidence adduced at the hearing on the preliminary injunction is (to the extent admissible at the trial) being considered by the Court as part of the record for the decision to be made by the Court at this time. See Fed.R.Civ.P. 65(a)(2). The preliminary injunction was, of course, issued under a different burden of proof than the Court must apply here in determining whether a permanent injunction should now be issued or the preliminary injunction dissolved.

The parties (with the approval of the Court) have entered into a stipulation whereby the issues mentioned above would be tried at this time before the Court on the plaintiff's complaint and the separate issues raised in Lincoln's counterclaim and third party complaint would be tried in a separate jury trial to be conducted after the decision on the issues now before the Court and final decision as to any appeal therefrom.

This is a diversity case removed from state court. Therefore, the law of the State of Nevada is applicable to the substantive issues. Hubbard Business Plaza v. Lincoln Liberty Life Ins. Co., 596 F.Supp. 344, 346 (D.Nev.1984) (prior memorandum decision and order issued in the case at bar) citing Bankers Trust Co. v. Pacific Employers Ins. Co., 282 F.2d 106, 110 (9th Cir.1960). It is the obligation of this Court to apply Nevada law as it is, not as it ought to be. Klingebiel v. Lockheed Aircraft Corp., 494 F.2d 345, 346-347 (9th Cir.1974); Southern Pacific Transp. Co. v. United States, 462 F.Supp. 1227, 1233 (E.D.Cal.1978). This Court is not free to predict possible changes in the Nevada law. Moore v. R.G. Indus., Inc., 789 F.2d 1326, 1327 (9th Cir.1986). Nor is the Court free to engraft upon prior state decisions exceptions or modifications which have not been adopted by the state courts. Stancil v. Mergenthaler Linotype Co., 589 F.Supp. 78, 81 (D.Haw.1984). See also Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3, 4, 96 S.Ct. 167, 168, 46 L.Ed.2d 3 (1975).

Preliminarily, the Court notes that the defendant makes some argument that the provision requiring payment by Hubbard of $22,000 upon its failure to take down the loan is not a liquidated damages provision, but is a provision that provided for the payment by Hubbard of consideration for services to be performed by Lincoln. The contractual provision did refer to the possible $22,000 payment as being "in consideration of our issuance of this commitment in holding ourselves willing and ready to make the loan referred to herein, and in consideration of the substantial services we have rendered and will be required to render and the expense which we will incur in the preparation for closing." The language of the provision at issue can be found at page 8 of Lincoln's Statement of Facts, document number 148.

On the other hand, the provision is titled "Liquidated Damages." Also, the provision was entered "in view of the difficulty of ascertaining the amount of damages which would be sustained by Lincoln should the within contemplated loan not be acquired...." The language goes on to provide that Hubbard was "obligated to pay to Lincoln liquidated damages in the amount ...".

The language of the contract is ambiguous as to exactly what the $22,000 payment would be for. The provision was drafted by Lincoln and, therefore, should properly be construed in favor of Hubbard. National Union Fire Ins. v. Reno's Executive Air, Inc., 100 Nev. 360, 365, 682 P.2d 1380, 1383-1384 (1984); Estwin Corp. v. Prescription Center Pharmacy, Inc., 93 Nev. 251, 252, 563 P.2d 78, 79 (1977).

Moreover, there are two facts that suggest that the $22,000 payment would either reimburse Lincoln for damages due to a breach by Hubbard or penalize Hubbard for such a breach. First, another provision of the contract required Hubbard to pay a non-refundable $11,000 commitment fee which was apparently meant to cover the costs incurred by Lincoln in preparing the loan. Because those costs were covered by that payment, it would have been unnecessary to cover them with another, uncertain, payment. Second is the fact that the $22,000 was conditional. The $22,000 payment was not to be required in case Hubbard took down the loan from Lincoln as the contract required. If Hubbard had taken the loan, Lincoln would still have incurred the expenses associated with preparing the loan. It therefore appears that the parties did not intend the $22,000 payment to be consideration for service provided to Hubbard by Lincoln.

The primary issue which this Court must now decide is whether the $22,000 constitutes liquidated damages which would entitle Lincoln to collect on the letter of credit, or constitutes a penalty which would entitle Hubbard to a permanent injunction against the collection of the letter of credit.

Liquidated damage provisions are prima facie valid; the party challenging the provision must establish that its application amounts to a penalty. Haromy v. Sawyer, 98 Nev. 544, 546-547, 654 P.2d 1022, 1023 (1982); Silver Dollar Club v. The Cosgriff Neon Co., Inc., 80 Nev. 108, 112, 389 P.2d 923, 925 (1964).

The intention of the parties is the overall inquiry. See Silver Dollar Club, 80 Nev. at 112, 389 P.2d at 925. There are several ways that the party challenging the liquidated damages can show that the liquidated damages provision was actually intended to provide for a penalty.

(A) First, Hubbard may show that the $22,000 was not a reasonable forecast of the damages Lincoln would be anticipated to suffer as a result of default by Hubbard in taking down the loan in accordance with the l.c.a. See Restatement (Second) of Contracts § 356 (1979); 25 C.J.S. Damages § 108 and cases cited thereat.

Evidence presented at the trial shows that it would have been anticipated that Lincoln would suffer the following damages if Hubbard defaulted in taking down the Loan:

"(a) It would be expected (as did occur) that Lincoln would have incurred expenses in processing the loan commitment application and in issuing the loan commitment evidenced by the l.c.a. Hubbard paid $11,000 as a loan commitment `fee' at the time the l.c.a. was executed. It is reasonable to assume that this $11,000 should have paid for whatever Lincoln was out in processing the application for the loan to the point of the l.c.a. It might be argued that the loan commitment fee was simply something that Lincoln was entitled to receive as consideration for issuance of the loan commitment independent of whatever services it was required to perform in that connection. However, the better inference is that Hubbard paid $11,000 for the loan commitment and that included payment for whatever expenses Lincoln incurred in processing the application and issuing the l.c.a. This is not to conclude that $11,000 in services had been performed by Lincoln by the time the l.c.a. was issued. Some substantial portion of the $11,000 may have represented (and no doubt did represent) pure profit to Lincoln for issuing the loan commitment.

"(b) It would be expected that Lincoln would incur expenses in processing the loan from the point of commitment to the time the breach or default of Hubbard occurred. Donna Wynne, an attorney and executive for Lincoln's...